Wednesday All Over the Place

Another rainy dark day. Now Friday is not looking good. Good thing I have such a sunny disposition! Short on time tonight, so some housekeeping, some feedback requests, and a few quick hits.

Blog of Interest
I recently came across the blog Accrued Interest. I find this strange for two reasons:
1. the blog has plenty of high quality, relevant content
2. How in the world did I ever miss a financial blog that uses Star Wars film quotes as taglines?????
Stop on by if interested. I will reference some work from that site below.

Facebook Feedback
What you have to understand about the author of Economic Disconnect is that I am basically "old school". I have only had a cell phone for 4 years, and I still have trouble text messaging. I will never "tweet". What I know about computers could be written on the head of a pin. I have a TV that is not a flat screen for goodness sake!

Basically I am not really into gadgets and tech toys. As of late whenever I try to get in touch with my friends I get the now common "just Facebook me" response. While I would prefer a phone call or even settle for an email, I would also not like to lose touch with about half the people I know!

That said, I would welcome reader comments regarding Facebook and any details of their experiences (good or bad) using it. I have a new poll question that can track your basic answers if you prefer to not leave a comment. Thanks in advance.

Sometimes Simple is Better
The daily market gyrations can get confusing at times, especially when one data point gets spun 10 ways till Tuesday. For comic relief I always read the Daily Reckoning's "Mogambo Guru". The author, Richard Daughty is hilarious and boils down basic macro imbalances to the core. Any article is great, tonight's is no exception:
Standing at the Gates of Economic Hell

06/10/09 Tampa Bay, Florida I look out of the periscope of the Mogambo Bunker Of Security (MBOS), and when I see my neighbor crying, and I remember that the new estimate of real unemployment is almost 20%, which comes out to one person unemployed out of every five people who need a job, which they need so that they can pay some bills and maybe have enough left over to have a little fun for a change, like maybe having a few drinks and a few laughs with my barstool buddies, just to get away from the wife and kids for just a few precious hours so that I don’t Freaking Lose It (FLI)
...And this last batch of Bad News On The Earnings Front (BNOTEF) is at the tail end of a long string of lower and lower earnings since the end of 2007, and this latest drop in earnings is down from January, when earnings were $45.95, which were down from this time last year when earnings of the S&P 500 were $62.28, which is down from September 2007 when the earnings of the S&P500 were over $85.00!
The really eye-popping result is that with the S&P 500 selling at 940, this means that the index has an astonishing price-to-earnings ratio of 130! Hahaha! Insane!
If you are not laughing in total disbelief, then an instructive way of looking at a P/E ratio of 130 is that if the company pays you all of the money it earns for the next 130 years, you will break even! Hahaha! 130 years to break even! Hahaha! Now you know why the laughter!But, then again, maybe gold, silver and oil stocks would be a good idea, since they must rise in price in response to all this new money that is being poured into the economy, and they sell at P/E ratios far less than this! Whee! This investing stuff is easy!

Great Stuff

Mixed Message
I hit the Yahoo Finance page after lunch and was treated to a headline mix that was a little mixed in message at 12:50 pm EST:

Notice headline #6-Treasury to Name Pay Czar on Wednesday
and headline #8-Obama Retreats on Wall Street Compensation

After reading it became clear the we are going to have a pay Czar who will make it a point to have companies issue voting proxies (those things you throw away when they come in the mail) which will ask shareholders to vote on compensation packages. the votes are NON BINDING of course, but hey, you have to compromise! I wish the pay Czar all the success I am sure he will have reigning in excess pay.

10 Year Treasury Auction: Was I Right or Wrong?
Last night I offered that the 10 year and 30 year bond auctions this week would go extremely well, as the FED could not allow a poor result. So how did I do?

Headline Response
All the major outlets were reporting a "poor" to "very weak" auction" which of course made me feel pretty dumb!

Results
From Bloomberg;

"The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold was 2.62. It was 2.47 last month and has averaged 2.40 at the past 10 scheduled sales."

That seems pretty good!
"Indirect bidders, the class of investors that includes foreign central banks, bought 34.2 percent of the notes, up from 31.9 percent in May. The average at the past 10 scheduled auctions is 25.8 percent."
Another solid hit!

So I was feeling vindicated. Of course there was one little problem, the higher yield;
"The notes auctioned today drew a yield of 3.99 percent, compared with the 3.975 percent forecast by seven bond-trading firms surveyed by Bloomberg News."
I mean, come on! A 0.015 miss on estimated yields!? What's the big deal?

Accrued Interest had this take:

10 Year Auction: This Place Can Get a Little Rough
The 10-year auction was horrible. Non-fixed income people don't realize how big a miss 3bps is on a 10-year auction.
The ancillary stats indicate no foreign flee. Indirect bids were the second highest this year. So people will buy bonds, they just want more yield to do it.
Meanwhile, this story on Russia is worth watching. Can they really increase their IMF holdings, and if they do, does it matter? Here are two links to read.
http://www.imf.org/external/np/exr/facts/finfac.htm
http://www.imf.org/external/np/exr/facts/gabnab.htm
Russia currently holds about $140 billion in U.S. debt. I understand none of that is in Agency holdings so I assume that's overwhelmingly Treasuries. China holds $768 billion.
Its counter-intuitive to me that the DXY is solidly higher while Treasuries sell off. I really think this sell-off has reached silly levels.

As a non-fixed income trader, I will have to take his word that a 3bps miss on a 10 year auction is a big deal. Does not seem that big. (As an aside, the tag "This Place Can Get a Little Rough" was spoken by Obi-Wan Kenobi as he and Luke Skywalker entered the Mos Eisley Space Cantina in Episode IV.)

So was I right or wrong? Seems a push at this point, I will wait for the 30 year results tomorrow to make a final decision.

A Word about Trade Size and Math
All the time I see statements across all kinds of media and forums that claim "rode this thing" to wherever or "I made a killing" doing this. Far be it for me to question anyone's claims, but sometimes you need a little perspective.

As an example, lets say you read that a person made a "killing" shorting, say silver (SLV), "all the way down" $15 to $13.50. I use silver here as an example only, it matters not that 3 large banks are short more silver than is available, I am using this purely for illustration purposes!

So in the above example, the awesome trader made a 10% gain on the "killer move".

A 10% gain.

Some math shows us that for some sample blocks of capital 10% gain would mean:
-on a $1000 position, he made $100
-on a $5000 position he made $500
-on a $25,000 position he made $2,500
-on a $100,000 position he made $10,000

So we see that unless Mr. Trader is a really big player, he is full of crap unless about $5,000 is a whole lot of money to him. I am of course leaving out various leverage plays and other instruments that may make this example a bit simplistic. I am doing that because I think the average person that reads my blog is not some crazy wild trader with an enormous arsenal of trading weapons and a huge cash position to play with.

My point is that you have to keep relative scale in mind when reading market commentary and results posting. Bear in mind a 1% move is immaterial to a small position, but may mean something different to a large one. I know, a bit nit picky, but I get tired of reading how well some say they are doing, then I look at what their stated positions are and realize they would need to have over a million dollars in play to be making a "killing". And maybe some do, but most do not. Especially nobody with the time to post on Yahoo Finance stock boards!!
NOTE: I made a blunder with the math by leaving off a zero in the original post! Sorry for the confusion. Told you I was bad a t math, and now proof reading as well.
Have a good night.